It’s not just the Dodd-Frank Act to reform our financial sector regulatory structure that is the target of Wall Street lackeys in the Congress of the United States — Remember Enron? Rep. Robert Hurt (VA-5) has his sights set on the Sarbanes-Oxley Act in his ironically labeled “Audit Integrity and Job Protection Act.” (H.R. 1564)

“Audit Integrity and Job Protection Act – Amends the Sarbanes-Oxley Act of 2002 (SOX) to deny the Public Company Accounting Oversight Board any authority to require that audits conducted for a particular issuer of securities in accordance with SOX standards be conducted by specific auditors, or that such audits be conducted for an issuer by different auditors on a rotating basis.”

Sounds simple doesn’t it? First, let’s get rid of the superfluous appendage “job protection act” portion of the title — the only jobs protected by the act are those of corporate executives, managers, and supervisors who are involved in the auditing process of corporations.

Secondly, the bill all but wipes out the independent auditing required of U.S. or international companies which have registered equity or debt securities with the Security and Exchange Commission, AND the accounting firms which do business with those corporations.

The current statute requires that all financial reports coming from a registered corporation include an internal control report. According to the SEC an internal control report must contain the following:

“… (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company; (2) management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year; (3) a statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting; (4) and a statement that the registered public accounting firm that audited the company’s financial statements included in the annual report has issued an attestation report on management’s assessment of the company’s internal control over financial reporting.” [SEC] (numbering added)

Note that the last (4th) item in the list requires the independent auditor selected by the corporation to review its books to attest to the adequacy of the internal controls. Thus, the auditors are supposed to let the public (and the investors who read such things) know that the corporation has been avoiding those questionable practices which brought us the great Enron Debacle.

Now, how do we insure that there’s no replication of the Enron/Arthur Andersen crash and burn? We’ve had a tragic object lesson in what happens when the corporation and the auditing firm get too snugly:

“…a firm (Arthur Andersen) that once stood for trust and accountability ended 90 years as an auditor of publicly traded companies under a cloud of scandal and shame. Its felony conviction for obstructing a federal investigation into Enron Corp., its now-notorious client, cost Andersen the heart of its practice. It will continue with a tiny fraction of the 85,000 employees it spread across the globe just months ago.” [ChiTrib 9/01/2002]

The Securities and Exchange Commission adopted rules to preclude these long term love-matches which resulted in the auditing firm being far more concerned with the “health” of its well paying client than with the “wealth” of the investors, shareholders, and the public. It sought to establish a sturdy curtain, if not exactly a wall, between the auditors and the corporations.

In setting the rules the SEC was to — and did — “establish rules that an accountant would not be independent from an audit client if any “audit partner” received compensation based on the partner procuring engagements with that client for services other than audit, review and attest services.” [SEC] The SEC went one more logical step and defined the role of the “audit partner.”

“Section 203 of the Sarbanes-Oxley Act specifies that the lead and concurring partner must be subject to rotation requirements after five years. The rules will specify that the lead and concurring partner must rotate after five years and be subject to a five-year “time out” period after rotation. Additionally, certain other significant audit partners will be subject to a seven-year rotation requirement with a two-year time out period.” [SEC]

“Beyond the independence of audit committees, Sarbanes-Oxley has strengthened auditor independence. The entirety of Title II of the Act is devoted to the topic of auditor independence. The intense focus on this topic reflects Congress’s appreciation that the audit process is most effective when investors are assured that audits are performed by objective and unbiased professionals. The Act bans auditors from providing the kinds of non-audit services to audit clients that could give rise to financial conflicts of interest. It emphasizes the role of audit committees in approving other services provided by auditors. And it requires audit partner rotation. All of this is more protection for investors, and less incentive for the auditors to do anything that detracts from their core mission.” (emphasis added)

The rotation of the audit partners, the selection of a new auditing firm periodically, combined with the prohibition of tacking on more, and often more remunerative, services was specifically intended to prescribe that “intent focus” on the actual financial situation of the corporation, and to proscribe the cozy long term love affairs between corporations and auditing firms that resulted in the collapse of Enron and the demise of Arthur Andersen.

It would be entirely too easy to dismiss Representative Hurt’s bill as a classic example of historical attention deficit disorder, but Wall Street has been paying attention to the Sarbanes-Oxley Act since its passage in 2002 — paying attention as to how it might be able to gut the law. What easier way than to prohibit the Public Company Accounting Oversight Board from enforcing the sections and rules promoting independent auditors?

Common sense and history notwithstanding, the House of Representative passed Rep. Hurt’s bill on July 8, 2013 by a vote of 321-62. [roll call 306] Nevada Representatives Amodei (R-NV2), Heck (R-NV3), and Titus (D-NV1) all voting in favor of the measure. Rep. Horsford (D-NV4) is recorded as not voting.

H.R. 1564 deserves to get buried in the Senate, or find itself the victim of the Veto Pen, along with other so-called “job protection” bills like repealing the Affordable Care Act and Patients Bill of Rights for the umpteenth time….